One thing is that I’ve never known anyone with financial disipline who rented all of his or her life. All of them want to own a house free and clear by the time they retire. Most of them are successful at this. I paid off the house I live in a few years ago myself. (And that’s in the San Francisco Bay Area.) Renting will never be cheaper than that.
If you bought at a good time, then you might have done better by buying, but that’s not always the case. And if you want an example of renting being cheaper than owning, consider the person who invested the difference, and whose investment throws off enough income to cover the rent, and generates additional income on top of that. I don’t know prices in the bay area, but lets say a house costs $500,000. Your costs of maintaining that house are, lets say $10,000/year (that’s property tax and maintenance). Renting an equivalent place might cost lets say $2,500/month. Further lets say investments will return 4% real (that is, after inflation). Someone who instead of buying had put away $500,000 in investments would be equivalently well off as you (that is, their investments would generate enough income to cover the difference between their rent and your property taxes). Since I’m considering their after-inflation return, they’re covered for rent increases, they’re significantly more mobile than a rent owner, and they don’t have to deal with the stresses of homeownership.
If, by not buying, they’d managed to save more than 500k, then renting would be cheaper than owning a home outright for that person.
You may not know many fiscally responsible people who rent, but I make up for that by knowing lots of them (including me).
ETA, my numbers are conservative. The rent-to-own ratio in San Francisco is 21, which means a 500,000 home would rent for approximately $1,985. And the renter only has to save $330,000 to live as well as the person who owns a $500,000 home outright.
Never heard of this rule anyplace I’ve lived. Landlords are sometimes unavailable, sometimes they claim the repair person is on the way (and never shows up) and sometimes the balance of power is with the landlord. The best situation I’ve been in is renting from people who had no other property, and lots of money, and who were very happy with us calling the repair people ourselves. But that has been rare.
Per year? And for maintenance alone? That clearly has to depend on location, since a $500K house in a low property value area is going to be bigger and need more maintenance than a $500 K house in a high property value area. Our house in the Bay Area has never needed that much maintenance over the past 15 years. We are now doing some major improvements, but that is going to be two years worth of your number at most.
I am one of those who feel buying a home is over-rated, so for the most part I don’t disagree. However I point out that a significant portion of the average american’s wealth is in their home, and that equity is a result, in part, of the home’s appreciation. (It was, obviously, this fact among others that led to the ridiculous speculation and housing bubble.)
Therefore one could say that in practice, the more typical response is not to be fiscally sound. It’s sort of like smoking…you could do a nice calculation showing the average smoker (or Starbucks devotee) how much their nest egg will increase if they kick the habit, but somehow in practice they don’t literally set aside the saved money.
Still, as a fellow mortgage-free poster, I do like the feeling. (In my case I own my house, so the recent market downturn is another reminder for me of the freedom of renting.)
Hardly anyone realizes that the tax system underwrites a massive transfer of money from renters to buyers. I am not talking only about deductibility of mortgage interest, though in the US (but not in Canada) that is part of it. Mainly it is the value of your investment in your house that provides free rent, but is untaxed. This was brought home to me when a friend arranged a sabbatical home exchange with someone in a different part of the country. No money changed hands and this exchange should have been tax neutral. But it wasn’t. Several years later, my friend learned that both he and his counterpart should have added the fair market value of the rents on their houses to their income for that year and paid taxes on it. The only time you are exempt is when you rent to yourself. Needless to say, the rent you putatively paid is not a deduction. This means that renters are paying higher taxes so that homeowners can pay less. Incidentally, in Switzerland (or at least in the canton of Zurich), the fair rental value of your home is added to your income for tax purposes.
There are other advantages to owning. My daughter in Brooklyn is renting an apartment that has lots of nice features, but several nasty ones (including that the basement under them is unheated, uninsulated and not even close to airtight). The have no incentive to make any improvements and in fact cannot. They can make no holes in the walls which made it very hard, for example, to put up a child gate to the second floor.
Both house prices and rent can go up over the years. I think that, especially given the tax laws in most places, buying has it all over renting. Although it may be different in Australia, I think that in the long run you are going to pay 10% of the sale value of a house in annual rent. Think about it this way. If you bought a house for rental income, then taking into consideration taxes, maintenance and a decent return on your investment would you do it for much under 10%?
Or not, that’s one of those things which vary by location and specific mortgage/rental conditions.
Another factor to take into account when choosing the “rent before buy” route, and one I’ve seen many young couples use, is that you don’t need as much house when you’re just married/moved in as you will later on (usually due to having kids, sometimes to parents moving in). So while you are still learning what your decorating style is, how you fit with each other, etc., you rent a small place - this allows you to stash money away so that once you’re settled within the relationship and you find yourselves wanting/needing more space, that’s when you buy.
My brother and his wife bought their first flat (2B1b) because she simply would not consider renting; later they moved to a double-decker, again bought. Her BFF lived in a rented 2B1b before buying a house: the cost for the BFF and her husband (taking diferring markets and so forth into account) was about 2/3 the cost for my brother and SiL, thus allowing a couple with lower income to get a place of a similar cost.
That’s not how taxes work. When you consume something you pay for it with after tax money, whether its renting a house or buying a house. You’re not “taxed” on your owners equivalent of rent because you already paid income tax on the money used to buy the house. If you buy a house and rent it, it would be a business and all your expenses (maintainance, mortgage interest, etc) would be deducted from your rents for tax purposes.
The American mortgage interest deduction is a “transfer”, but only in the sense that it evens the playing field between renters and owners - a landlord can already deduct his mortgage interest from his rental income as a business expense, which improves his relative return and in theory would drive down rental rates.
As a real estate owner you have no control over what market rents are. The alternative to a return on your investment less than 10% would be a return of at least -1%, the property tax rate of most places in North America. Currently, over 70% of Canadian households own real estate. There are many more houses than there are people to rent them.
In a properly rational market, renting should ALWAYS be much more expensive than buying. Renting = no market exposure = no risk to your capital. More risk = higher return, it’s really that simple.
Sure, in theory there are many situations where it’s possible to do better renting than buying. What I’m saying is that I never met anyone who rented their whole life and who was financially savvy enough to do what you suggest. Essentially, they DON’T invest the difference. The ones who do are the ones who end up buying a house eventually. In my experience.
Laws do vary… and so do landlords’ compliance with the laws, which is why it’s in a tenant’s interest to be up on the requirements.
To also respond to your comment about maintenance costs: the number cited was 1-2% per year, so that gives a pretty broad range to account for high-value areas vs low-value areas. But don’t forget that prices for repairs also vary by region. Labor costs are higher in San Francisco than they are in Barstow.
What most people forget about in maintenance costs are the big, periodic costs: re-carpeting, re-roofing, re-painting. Replacing furnaces, refrigerators and stoves. If you spend $20,000 fixing a roof every 20 years, then that’s $1,000/yr of average maintenance cost all by itself.
Cost do vary, but not to the level that housing prices do. I say this with 15 years worth of data. Costs also vary with location - here in the Bay Area we don’t have freeze/ thaw cycles or salt water to rot things. But I definitely agree with the major point - you need to factor in maintenance costs which are reasonable for your area when figuring out the cost of home ownership. In fact, I’ve found that you need a cash cushion after you move in, because there are always a ton of stuff you decide you need even in the nicest of houses. There has always been a rut dug between my new house and the hardware store.
On the other hand, I’ve just finished paying for college for my last kid, and I’ve found that a whole new set of ceiling lights and fans cost less than one month’s tuition payment - plus we can now see what we are cooking.
That is a good point. I’d add a few more reasons. First, when you rent you are paying a markup for the landlord’s profit. True rents are controlled by market conditions, but since all landlords are going to demand a profit in a steady state situation, it will be factored into the price.
Second, owning and renting costs should be roughly equal at the time of home purchase. After that rental prices will tend to increase while owning costs will stay relatively constant. Also, mortgage costs will be a shrinking part of income (assuming growth in income) while rental costs may or may not increase with average income increases. When I bought my house 15 years ago the cost of my mortgage was about 20% of my gross pay, not it is more like 12%. There is no way I could rent a house of comparable size for what I’m paying, and I’m not counting tax advantages which I do get.
No, that’s a silly and misleading way of saying I bought a house 15 years ago and now its worth more than it was 15 years ago. If you think houses are going to go up in value forever then obviously you should borrow as much as you can and buy as many houses as you can, but I don’t think that’s very useful advice.
Thanks for the input all.
The problem, really, is that Australia is the middle of a massive housing bubble:
Which sways the calculation towards renting at the moment, instead of buying.
I see that nobody has suggested the other alternative [if the house is set up so it is possible]
Turn part of it into an income generating flat. There is a show on HGTV where the guy goes to peoples houses and turns basements/attics.whatever into an income generating flat.
Honestly, if I had it all to do over again, instead of buying the farm with a ranch and no basement, I would instead have gotten mrAru to buy both sides of a duplex, or a property that had a space able to be turned/already made into a flat so we could rent it out.